Daily Rules, Proposed Rules, and Notices of the Federal Government
On June 16, 2008, the Commission, in the first of three related actions, proposed a series of amendments to its existing rules governing the conduct of NRSROs under the Securities Exchange Act of 1934 (“Exchange Act”) as well as a new rule mandating additional requirements for NRSROs.
On February 2, 2009, the Commission adopted, with revisions, a majority of the rule amendments proposed in the
Today, the Commission is adopting, with revisions, the rule amendments proposed in the
In enacting the Rating Agency Act, which provides the Commission with the authority to establish a registration and oversight program for NRSROs, Congress cited as its purpose “to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.”
The Commission received letters from 31 commenters
The Commission notes that in addition to citing fostering competition in the credit rating industry as one of the purposes of the Rating Agency Act, Congress stated its finding in the Rating Agency Act that “additional competition [among credit rating agencies] is in the public interest.”
In summary, the Commission is adopting amendments to paragraph (d) of Rule 17g-2 and paragraphs (a) and (b) of Rule 17g-5 as well as a new paragraph (e) of Rule 17g-5 and a conforming amendment to Regulation FD.
The amendments to paragraphs (a) and (b) of Rule 17g-5 being adopted today, substantially as proposed in the
In order to allow NRSROs sufficient time to implement the new disclosure requirements, the compliance date of the amendments is delayed until 180 days after publication in the
Rule 17g-2 requires an NRSRO to make and retain certain records relating to its business and to retain certain other records made in the normal course of business operations. The rule also prescribes the time periods and manner in which these records are required to be retained and, as described below, requires certain of those records regarding ratings histories to be publicly disclosed.
Paragraph (a)(8) to Rule 17g-2 requires an NRSRO to make and retain, as part of its internal records that are available to Commission staff, a record of the ratings history of each outstanding credit rating it maintains showing all rating actions (initial rating, upgrades, downgrades, placements on watch for upgrade or downgrade, and withdrawals) and the date of such actions identified by the name of the security or obligor rated and, if applicable, the CUSIP for the rated security or the Central Index Key (CIK) number for the rated obligor.
While paragraph (a)(8) of Rule 17g-2 and the amendments to Exhibit 1 were adopted in the
Consequently, the Commission re-proposed amendments to paragraph (d) that would require disclosure of ratings histories for 100% of the issuer-paid credit ratings outstanding. In addition, the Commission asked a series of detailed questions to elicit information about how the rule proposal would impact issuer-paid NRSROs and whether the rule should be expanded to apply to all credit ratings: issuer-paid, subscriber-paid, and unsolicited.
The amendments proposed in the
The Commission received responses from twenty-three commenters addressing various aspects of the proposed amendments to paragraph (d) of Rule 17g-2 and responding to some of the questions posed by the Commission.
As discussed in detail below, the Commission is adopting paragraphs (d)(1) and (d)(2) substantially as proposed. However, in response to the comments received and to facilitate the ability of users of credit ratings to directly compare the ratings performance of all NRSROs, the Commission is expanding the ratings history disclosure requirement in new paragraph (d)(3) to include ratings history information for all NRSRO credit ratings initially determined on or after June 26, 2007 (the effective date of the Rating Agency Act), whether issuer-paid, subscriber-paid, or unsolicited. The amendment as adopted requires a ratings action on an issuer-paid credit rating to be publicly disclosed no later than twelve months after it is taken, as proposed in the
In addition, as discussed in detail below, the Commission has not yet published the List of XBRL Tags for NRSROs on its Internet Web site. Consequently, the Commission is clarifying in the rule text of new paragraph (d)(3) of Rule 17g-2 that an NRSRO can make the required ratings history data publicly available in any machine-readable format, including XBRL, until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in XBRL format using the List of XBRL Tags for NRSROs.
As adopted, paragraph (d)(1) of Rule 17g-2 consists of the record retention requirements of paragraph (d) as originally adopted by the Commission in the
The Commission did not receive any comments on this proposal to codify the existing requirements of paragraph (d) as new paragraph (d)(1) and is adopting it as proposed.
Paragraph (d)(2) of Rule 17g-2, as adopted, consists of the ratings history disclosure requirements adopted by the Commission in the
The Commission notes that the 10% requirement and 100% requirement will provide different types of data sets with which to analyze and compare the performance of NRSROs' credit ratings. For example, the 10% requirement applies to all outstanding and future credit ratings that fall within the rule's scope (
The 100% ratings history disclosure requirement will result in a different data set. It will be broader in scope but more limited in time, applying only to credit ratings initially determined on or after June 26, 2007. The 100% disclosure requirement also allows for a longer delay between the time a ratings action is taken and the time it must be disclosed—twelve months for ratings actions on issuer-paid credit ratings and twenty-four months for ratings actions on ratings not issuer-paid—as opposed to the six month delay allowed under the 10% disclosure requirement. The 100% ratings disclosure will provide for a more granular comparison of the performance of an NRSRO's credit ratings. In particular, it will require ratings history disclosure for every outstanding credit rating of each NRSRO. This will permit users of credit ratings and others to take a specific debt instrument and compare the ratings history for the instrument of each NRSRO that rated it. Thus, whereas the 10% requirement will be limited to analyses using a statistical sampling, the 100% requirement will facilitate analyses of how the NRSROs each rated a specific obligor, security, or money market instrument. In addition, as discussed further below, whereas the 10% requirement is limited to issuer-paid credit ratings, the 100% requirement covers all credit ratings regardless of the business model under which they are issued, thereby allowing comparisons across and among a broader set of NRSROs. Thus, the comprehensive disclosure of ratings histories for all outstanding credit ratings will facilitate a more fundamental ratings-by-ratings comparisons across NRSROs, and will also generate data that can be used to develop independent statistical analyses of the overall performance of an NRSRO's credit ratings in total and within classes and subclasses of credit ratings (e.g., within product or industry types). This will provide users of credit ratings with more ways to analyze the performance of the NRSROs' credit ratings. The increased ability to
Furthermore, the Commission notes that while the 100% requirement will be useful to market participants and observers within a short period of the rule being effective (the vast majority will be available at twelve months) for the purposes of comparing the performance of different NRSROs rating the same obligors or instruments, due to the June 26, 2007 cutoff date and the longer grace periods, it will take time for the new 100% disclosure requirement to generate the comprehensive data pool necessary for thorough independent analysis and comparison of the long-term ratings performance of the NRSROs. In the meantime, the 10% requirement will provide ratings performance information on issuer-paid credit ratings (the vast majority of outstanding NRSRO credit ratings). Thus, in addition to the other benefits of retaining the 10% requirement, the ratings performance and information it provides will help bridge the gap until the 100% requirement has generated a robust set of data.
In light of the different structures of the two ratings history disclosure requirements as well as the different data sets which they will provide, and the corresponding complimentary ways in which they will advance the goals of the Rating Agency Act and the Commission's rules, the Commission believes that it would be beneficial to retain the 10% ratings history disclosure requirement alongside the new 100% disclosure requirement being adopted today.
Accordingly, the Commission is adopting new paragraph (d)(2) to Rule 17g-2 as proposed.
As adopted, new paragraph (d)(3) to Rule 17g-2 requires each NRSRO to disclose ratings history information for 100% of its credit ratings initially determined on or after June 26, 2007, with each ratings action to be disclosed no later than twelve months or twenty-four months after it is taken, depending on whether the rating is issuer-paid. Any ratings action information required under the 100% disclosure requirement with respect to issuer-paid credit ratings need not be made public less than twelve months from the date such ratings action is taken. A ratings action on a rating that is not issuer-paid need not be made public less than twenty-four months from the date it is taken. As noted above, this represents a modification of the proposed amendment, which would have applied the 100% disclosure requirement only to issuer-paid ratings with a twelve month grace period. The Commission requested comments on a number of specific questions pertaining to this provision of the proposed amendment, and the modifications are designed to address the comments received in response to those questions.
The Commission specifically requested comment on whether the proposed 100% disclosure requirement should apply equally to issuer-paid and subscriber-paid credit ratings.
Five commenters argued that the rule should not apply to subscriber-paid credit ratings.
The Commission also asked whether the rule should apply to unsolicited credit ratings.
The Commission believes the rule should apply to all types of credit ratings, whether issuer-paid, subscriber-paid, or unsolicited. The intent of the rule is to facilitate comparisons of credit rating accuracy across all NRSROs—including direct comparisons of different NRSROs' treatment of the same obligor or instrument—in order to enhance NRSRO accountability,
For example, if three hypothetical NRSROs—X Credit Ratings Company, Y Credit Ratings Company, and Z Credit Ratings Company—each rated a hypothetical ABC Security, the 100% requirement would allow an investor to directly compare the ratings performance of those three NRSROs for that security. To illustrate, assume that when ABC Security was issued in August 2007, X Credit Ratings Company and Y Credit Ratings Company initially gave it their highest rating of `AAA,' while Z Credit Ratings Company initially rated it as `A.' Assume further that in March 2008, X Credit Ratings Company downgraded ABC Security to `AA,' followed by a June 2008 downgrade to `A,' while Y Credit Ratings Company maintained its `AAA' rating for ABC Security until August 2008, at which point it downgraded it to `A.' Assume also that Z Credit Ratings Company maintained its `A' rating for ABC Security without change. Under the 100% disclosure requirement adopted today, an investor reviewing the ratings histories in August 2009 would be able to see that X Credit Ratings Company and Y Credit Rating Companies had, by August 2008, arrived at the same `A' rating for ABC Security—but they will have taken significantly different paths to get to that rating:
By examining the credit rating histories of the three hypothetical NRSROs for ABC Security, an investor will be able to perform an individual analysis of which NRSROs did the best job in determining an initial rating and in making appropriate and timely adjustments to the credit rating.
The Commission believes that the new disclosure requirements will foster greater accountability and transparency for ratings performance for NRSROs as well as competition among NRSROs by making it easier for persons to analyze the actual credit ratings performance of NRSROs in assessing creditworthiness, regardless of the business model under which an NRSRO operates. These disclosures may also enhance competition by making it easier for smaller and less established NRSROs to develop proven track records when determining credit ratings and for potential users of their ratings to evaluate the relative quality and performance of these NRSROs.
In addition to facilitating individual comparisons of NRSRO ratings performance, disclosure of ratings histories will allow market observers to generate statistics about NRSRO performance by compiling and processing the information in the aggregate. Currently, NRSROs are required to publicly disclose internally generated default and transition performance statistics in Exhibit 1 of Form NRSRO. The existing disclosure requirements of Exhibit 1, as amended in the
As discussed above, the arguments raised by commenters for excluding particular types of credit ratings from the rule's scope focused largely on the potential that the disclosure requirement will result in undue costs to, or have a disproportionate negative impact on the revenues of, NRSROs that issue that type of credit rating.